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Financial Advice and The Young Single Woman

Research conducted by Royal London found that people without a financial adviser were more likely to be female, single, earning around £20-£30,000, and under the age of 35. As a 27-year-old single woman, I fall smack-bang into the middle of this category and was disappointed (but not surprised) when the statement presented itself to me. After some research and a lot of self-reflection, I now feel obligated to provide an insight into the intricacies of this finding from a personal standpoint.

‘I don’t earn enough to seek financial advice.’

Talking about money does not come easily for most of us. It is a personal matter and can feel uncomfortable to discuss. Despite this, it is very important that we do talk about the ‘m’ word. At times, my perception of my own finances has made me feel that I did not earn enough money to warrant financial advice. I did not have enough self-confidence to approach a professional from the financial industry. I think my pre-disposed view of a testosterone-fuelled, overly male-dominated Wall Street had led me to believe that investing was not particularly catered towards women.

I am now aware, however, that specialised advice from a professional adviser can help me set realistic financial goals – and reach them. Ironically, my previous perception of my financial status meant that I denied myself the opportunity to strategically grow my wealth in the first place. To back this up, Royal London and the International Longevity Centre UK (ILC) found that, in the space of just 10 years, customers who had sought financial advice were, on average, £47,000 better off than those who had taken care of things themselves.

‘I don’t have time to seek financial advice.’

A young woman living in the 1950’s and 60’s was typically expected to marry, have children, and assume the role of primary caregiver. Times have (thankfully) changed and for the most part, women can now progress into further education and a career of their choice – should they wish to do so.  The ‘modern woman’ is her own person, has her own money, and can have it all. The only downside of this is that many women are required to perform a constant juggling act between family, friends, and career – often prioritising the needs of others before their own. Perhaps women of this day and age are just so busy living a full life, that they do not have time to seek financial advice?

As it turns out, we have plenty of time. On average, women live 5 years longer than men. Therefore, it makes sense for us to prepare for long-term financial stability and the best way to do this is with professional, preferably long-term, financial advice. One of Royal London’s key findings was that those who fostered an ongoing relationship with their adviser were up to 50% better off than those who had only received advice once.

‘I don’t believe that financial advice would benefit me.’

Money makes the world go round and most of us will experience ‘money worries’ at some point in our lives. New statistics from Fidelity International show that 47% of young women have had their mental health affected by financial worries, but only 12% surveyed would ask for help from a financial adviser. When I feel stressed or over-whelmed, I typically tend to seek advice from friends, family or even a work colleague. To improve my general well-being, I might go shopping, force myself to attend a spin class at the gym or perhaps even visit my GP if necessary.

This year, more than any other, has made me realise the importance of looking after my mental health. I recently realised that when I feel positive about my financial situation, I feel positive about myself. Good quality financial advice can improve emotional as well as financial well-being and the practice of sound financial planning in our 20’s and 30’s builds a strong foundation for a secure future.

And the uncertain times that we now find ourselves in makes the prospect of a secure future all the more appealing.

The year of 2020 has been challenging to say the least. Due to the Covid-19 crisis, the UK went into its first national lockdown on the 23rd March, and, by the end of April, my days had blurred into one self-isolated Groundhog Day. I had lost all sense of routine and was struggling to work productively from home. To add to this, my only form of contact with friends and family was via repetitive virtual quizzes. I was then furloughed and spent my days attempting DIY, and my nights battling anxiety caused by a looming threat of redundancy. It is now apparent that my concerns were not without rationale. New findings from the European Institute for Gender Equality and our Institute for Fiscal Studies indicate that women will be disproportionately affected by job losses as a result of the current economic conditions.

Bottom line; women have never been more in need of financial advice than they are now.

Women of the past fought for our right to vote. Today, we are still striving for equality in relation to the gender pay gap, and it now appears that we are stuck in a pensions gender gap too. Research undertaken by NOW: Pensions and the Pensions Policy Institute has revealed that women in their 60’s have an average of £100,000 less in their pension than men do. 

For me, when it comes to a lack of women receiving financial advice; the worst part of it is that this time, we have nobody to blame but ourselves. I, therefore, implore all women to seek financial advice. You may just unlock your financial potential…

Chloe Speed

24/09/2020

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As the midnight hour draws near, how will Brexit conclude?

Please see below the latest market insight from Karen Ward at JP Morgan, with particular reference to the ongoing complexities of Brexit.

An American colleague joined me on a call recently and was perplexed by the fact that I was talking about Brexit. “Isn’t Brexit done?”, he asked me. Alas, no. While the UK did officially leave the EU on 31 January, for the economy nothing actually changed since the UK entered into an 11-month period of transition. During this period, the UK and EU were supposed to agree on a future trade arrangement to commence on 1 January 2021. The clock is well and truly ticking.

Negotiations are proceeding slowly and significant differences still remain. At the root of the problem is the same issue that has plagued the discussion for the last four years. The UK wants to regain control – to become fully sovereign – setting its own rules and regulations overseen by British courts. However, the EU is not willing to grant significant access to the single market without guarantees that standards will not be undercut to gain competitive advantage.

So what happens next? Either the next six months will see a breakthrough and a free trade agreement (FTA) will be established or the UK will leave and trade on World Trade Organisation (WTO) terms.

Trading on WTO terms has been used synonymously with ‘hard Brexit’. What exactly does that mean? The short answer is potential tariffs, more customs paperwork for businesses that trade with the EU and potentially the need for the UK to be removed from EU supply chains if regulatory conformity cannot be guaranteed. It is these nontariff barriers that we would expect to have the most economic impact. There could also be significant ramifications for financial firms since the UK would lose its passporting rights – its ability to serve EU clients from the UK. Advocates for a hard Brexit argue that a clean break would allow the UK more flexibility in negotiating future trade deals with other trading partners, although any benefit from these agreements would still only be seen once these trade deals had been implemented, which is often a lengthy process.

What will happen and what will be the implications for markets? In our view, the announcement of a comprehensive FTA might see sterling rise to 1.45 against the US dollar. By contrast, in a no-trade deal scenario we see sterling closer to 1.10 against the dollar. Much weaker sterling would partially help the UK to cope with new trade frictions.

Our central expectation is that despite ongoing near-term sabre-rattling, by year end pragmatism will prevail and a relatively narrow trade deal will be agreed. When ‘Brexit’ was added to the English dictionary, the word ‘fudgery’ should also have been included.

We expect a significant amount of ‘fudgery’ in order to get a partial trade agreement done. This may, in fact, involve highlevel agreements that disguise what is essentially a transition to iron out the finer details. Such a narrow trade deal will likely still be disruptive to economic activity in the EU and the UK over the long term. But we expect various arrangements to ease the near-term burden of the change for both sides. We expect that both sides will want to minimise the day 1 disruptions given the extent to which both economies are still struggling to overcome the Covid-19 recession. Therefore, changes may well be phased in over time, spreading the economic cost over a number of quarters if not years. The UK could thus claim the sovereignty to set their own rules and standards without initially making substantial disruptive changes.

While this outcome is our central expectation, there are significant risks around it that investors should be mindful of. Sterling may be particularly volatile and, with almost 80% of revenues coming from abroad for the FTSE 100, this will also have implications for the stock market, since higher sterling could put downward pressure on earnings and vice versa should sterling fall, all other things being equal. However, we caution against relying too heavily on the FTSE rallying in the event of a hard Brexit as a disorderly Brexit would be likely to impact both UK and EU activity negatively, depressing some of the overseas earnings that matter to UK companies.

We will continue to provide the most up to date information on the markets and economy. Please check in with us again soon.

Stay safe.

Chloe

24/09/2020

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Legal and General: Our Asset Allocation team’s key beliefs

Please see below for the latest blog from Legal and General’s Investment Management Team regarding their ‘key beliefs’ regarding the markets:

Forward looking

It may seem difficult when faced with the latest political developments and a second wave of COVID-19, but investors need to be forward looking. If markets are indeed relatively efficient pricing mechanisms, we shouldn’t focus too much on what’s happening today; instead we need to think about what could happen tomorrow and beyond.

As with all Key Beliefs emails, this email represents solely the investment views of LGIM’s Asset Allocation team.

Pent-up demand unleashed

From an equity perspective, the losers from social distancing have been hit hardest by the pandemic. But if and when consumer behaviour normalises, these stocks should also benefit disproportionately.

In the spring and summer, such a recovery felt too distant for the travel and leisure sector, so we preferred other laggards like autos and small-caps. But as time has passed, we now expect generally positive macro news over the coming three to nine months (on vaccines, rapid testing and regulatory decisions) to start becoming a tailwind for this sector as well.

While we have no edge on the specific events, market expectations do not look excessive: sentiment is still bearish on the sector and performance has remained underwhelming and stuck in the middle of the post-pandemic range.

A vaccine should help these stocks in two ways: through de-risking the future path of their earnings, and through upgrades to earnings estimates if consumers resume their past behaviours faster than expected. This has already happened for other sectors, perhaps helped by some pent-up demand after the lockdown.

That’s not to say there are no risks to this trade. A greater-than-expected second wave could further delay a restart, customers could reject the changes made to the travel and leisure experience, or outbreaks on cruises could set back the wider sector.

But we believe that being closer to a potential turning point in the news flow, without having seen any meaningful outperformance for the sector, makes the risk/reward dynamics attractive enough for a first step.

Powerful gambit

European Commission President Ursula von der Leyen gave her annual State of the Union address last week. Invoking Margaret Thatcher in an argument with a Conservative British Prime Minister was a bold but powerful gambit. In the words of the original Iron Lady back in 1975, “Britain does not break treaties. It would be bad for Britain, bad for relations with the rest of the world, and bad for any future treaty on trade.” The sense of frustration with the shenanigans in Westminster is obvious.

It is tempting to think that the latest dispute is terminal for the prospect of a successful conclusion to trade talks. But the nature of brinkmanship is that it drives matters to the brink. Almost all European negotiations go to the 11th hour or beyond, so it is pretty hard to infer anything definitive at this stage.

If forced to pick a direction for sterling from here, we think appreciation is more likely than further depreciation. Portfolios naturally heavy on foreign currency therefore need to be increasingly mindful of a “rabbit out of the hat” moment driving the pound higher.

For non-Brexit obsessives, von der Leyen also had some interesting things to say about green bonds and carbon objectives. The EU is set to embark on an unprecedented issuance spree to finance the recently agreed Recovery Fund. Up to 30% of the planned €750 billion will be raised via green bonds. In the short term, we think the surge of EU issuance risks driving up yields in ‘semi-core’ European nations like France. Over the longer term, given that the green-bond market totals around $400 billion outstanding today, this will really bring the asset class into the mainstream.

Off the charts

We have highlighted the TIM Monitor a few times in previous Key Beliefs as one of a number of quantitative risk environment indicators that we use. The monitor aims to provide a characterisation of the current market environment and the likelihood of extreme losses going forward based on the combined information from two indicators: the Systemic Risk Index, which measures equity market fragility, and the Turbulence Index, a measure of ‘unusualness’ in global equity returns.

Needless to say, equity markets proved to be both fragile and extremely unusual in the first quarter, so much so that the TIM Monitor was quite literally off the charts. The monitor moved into ‘Alert’ territory on 25 February, with the S&P 500 down by around 7.5% from its peak at that point. After that, the S&P 500 fell a further 30% to its low on 23 March. The monitor remained in ‘Alert’, with the Systemic Risk Index remaining uncomfortably high, until 17th August when it finally switched back to ‘Warning’, almost exactly at the time that US equities returned to their previous highs. So, it was a timely indicator to get out of equities, but a bit slow to get back in again.

The length of its tenure in ‘Alert’ territory in part reflects the fact that a small number of key drivers propelled the market back up again – swift and comprehensive monetary policy responses over the past decade have had a tendency to do exactly that in times of stress. But we must also acknowledge that it is partly down to how the Systemic Risk Index is constructed, as it is an intentionally (sometimes painfully) slow-moving indicator.

Within an investment process involving judgement, these types of frameworks can be extremely useful in providing a different lens through which to view the world. Each one comes with its own nuances, however, and hence we believe they are best used in combination with other metrics rather than in isolation.

Detailed and focussed opinions from market leading investment managers such as Legal and General can be a useful addition to your overall view of the markets.  

Please keep reading our blogs to ensure your holistic view of the markets is well informed, diversified and up to date. 

Keep safe and well

Paul Green

23/09/2020

Team No Comments

Weekly Market Update

Please see below a useful update received from Blackfinch Group which covers this week’s events from around the world.
UK COMMENTARY
Restrictions on social gatherings are reintroduced along with some tighter local restrictions. The government does not rule out another national lockdown if necessary.

MPs voted to back the Internal Markets Bill that will give the government the power to override parts of the Brexit agreement with the EU. The bill passed by 340 votes to 263. 

Data from the Office for National Statistics (ONS) shows that the UK has lost 700,000 jobs since March, with a further 5 million people still temporarily out of work.

Four-week grocery sales growth slowed by 8% in August, the lowest since April, with shoppers spending £155mln less in supermarkets. The data showed the impact of the hospitality sector reopening, with alcohol sales falling and personal grooming sales increasing. 

Inflation, measured by the Consumer Price Index, fell to 0.2% in August, from 1.0% in July, impacted by the Eat Out to Help Out scheme and the reduction in VAT on the hospitality sector.

The Bank of England policy committee votes unanimously to leave interest rates on hold, noting that UK economic growth in July was around 18.5% above its trough in April, but remained 11.5% below the fourth quarter of 2019. The bank ‘stands ready’ to adjust interest rates, bond buying and other monetary policy measures if necessary.

UK retail sales volume, including petrol, rose by 0.8% month-on-month in August according to the ONS, meeting analysts’ expectations. Year-on-year growth increased to 2.8%.
US COMMENTARY
The Federal Reserve makes no changes to policy at its latest meeting, although it did guide that it intends to keep interest rates low until 2023. The central bank also implicitly ruled out the possibility of negative interest rates.

Weekly initial jobless claims rose by 860,000, marginally above estimates, with continuing claims at 12.63mln.

Donald Trump reportedly gives his ‘blessing’ to a partnership between TikTok and US firms Oracle and Walmart, easing talk of a ban on the service in the US.
ASIA COMMENTARY
The Bank of Japan leaves monetary policy unchanged and upgraded its assessment of its economy, stating that data was improving after the shock caused by the COVID-19 pandemic.
GLOBAL COMMENTARY
The Organisation for Economic Cooperation and Development (OECD) predicts that the global economy will shrink by 4.5% in 2020, better than the 6% collapse it has forecast in June. The data suggests that should the pandemic be contained then global Gross Domestic Product (GDP) will rise by 5% in 2021, but if there are major second and third waves of infection, then this will likely reduce the growth to 2-3%.

Oil prices came under pressure after OPEC downgraded its outlook for global oil demand for the rest of the year and the International Energy Agency (IEA) cut its oil demand forecast for 2020 for the second month running.
COVID-19 COMMENTARY
The total number of daily cases reached new heights, but the number of daily deaths remains below April’s peak.

Pfizer announce that the effectiveness of its COVID-19 vaccine could be confirmed by October.

Novavax Inc announces expansion of its deal with India’s Serum Institute to produce 2bn doses of its COVID-19 vaccine annually, with all planned capacity to be brought online by mid-2021.

Moderna Inc states that it may soon submit its COVID-19 vaccine for emergency authorisation for people at high-risk, should the latest trials prove at least 70% effective.

We will continue to provide the most relevant articles and original blogs so please check in again with us soon.
 
Chloe

23/09/2020
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Brewin Dolphin – Markets in a minute

Please see below this week’s market commentary update article from Brewin Dolphin, which was received late yesterday afternoon:

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

23/09/2020

Team No Comments

Markets sell off as further restrictions expected to be announced this week

Please see below weekly market commentary received from Brooks Macdonald yesterday afternoon following developments in the ongoing Covid-19 crisis.

  • Equity market sentiment is rattled by rising European coronavirus cases and expected restrictions
  • The nomination of a new US Supreme Court Justice ahead of the US election may create a substantial conservative skew in the court
  • Flash Purchasing Managers Index figures on Wednesday will be closely watched for any change in sentiment around the economic outlook

Equity market sentiment is rattled by rising European coronavirus cases and expected restrictions

Markets in Asia and Europe are selling off this morning as coronavirus cases in Europe continue to rise, prompting expectations of further restrictions being announced in the coming days.

European governments are again stuck between desires for a change in the viral trajectory but also no further national lockdowns. An increase in hospitalisations within France and Spain, thought to be a few weeks ahead of the UK, has concerned UK policymakers who are wary of the backlash after being seen as ‘behind the curve’ in March. LBC radio reported that London Mayor Sadiq Khan may recommend tightening rules for London as soon as today with further nationwide restrictions possible over the coming days. Further afield, South Korea will be trialling a tightening of social distancing rules for a fortnight at the end of the month to reduce the level of carriers which is a similar principle to the ‘circuit breaker’ being discussed by UK Prime Minister Boris Johnson.

The nomination of a new US Supreme Court Justice ahead of the US election may create a substantial conservative skew in the court

Whilst the focus in the US has been the Presidential Race, with the death of Justice Ginsburg, the nomination of a new Justice is taking centre stage. With the Senate being aligned to the Republicans, it is highly likely that Donald Trump’s eventual nominee will have a vote on the floor of the Senate before the election. Should this be successful, the US Supreme Court will have a 6 to 3 skew towards conservative/Republican Justices. Given the Supreme Court is used, in part, to set gradations to controversial laws around abortion and gun law, any skew will have a lasting impact regardless of who wins the Presidential election in November. Whilst arguably there was a precedent set in 2016 to wait for the new President to choose a Justice, with the White House and Senate aligned in 2020 this is unlikely to be repeated.

Flash Purchasing Managers Index figures on Wednesday will be closely watched for any change in sentiment around the economic outlook

The flash Purchasing Managers Index (PMI) on Wednesday will be an important temperature check of business sentiment as economic and social restrictions mount in Europe. With restrictions ramping up over the last fortnight it may be too soon to see this feed into the data. Forward looking data such as the PMIs is particularly sensitive to shorter term changes in sentiment, therefore any uncertainty around the future of European economic growth under new restrictions will likely feed through to that dataset in the next month.

Please continue to visit our blog for the latest information on financial matters and the markets.

Please stay safe in these uncertain times.

Chloe

22/09/2020

Team No Comments

Is oil still on a slippery slope?

Please see the below article received by AJ Bell late yesterday:

A report from BP suggests demand for crude has already peaked.

Oil major BP’s (BP.) latest annual World Energy Outlook, released in conjunction with a three-day presentation from chief executive Bernard Looney and team outlining the oil major’s new strategy, offers three scenarios for demand for crude oil in 2050.

They range from 89 million barrels a day, barely 10% below 2019’s peak of 98 million as nothing much changes politically or socially, all the way down to 24 million, as the world goes carbon neutral.

The possibility that oil demand could go down by three-quarters between now and 2050 means Looney’s desire to prepare BP for a zero-carbon world is perfectly understandable.

It also leaves investors with a decision to make. Those willing to select individual securities on their own must now decide whether to place their faith in Looney and the company’s ability to reinvent itself. Its plan is made all the more complicated by weak oil prices depriving BP of vital cash flow, just when it needs to invest heavily in both its new strategy and the maximisation of value from hydrocarbon assets where there are already considerable sunk costs.

Those who wish to avoid the rough and tumble of stock-specific risk and prefer to use active or passive funds must still assess their potential for exposure to BP and other oil stocks.

This is particularly the case in the UK, where analysts’ consensus forecasts for 2021 assume that BP and Royal Dutch Shell (RDSB) will generate between them 7% of total FTSE 100 profits and 11% of the headline index’s total dividend pay-out.

WANING WEIGHTING

Whether such forecasts are reliable, too optimistic or too conservative will be especially important for investors in FTSE 100 tracker funds, as they indirectly own BP and Shell whether they like it or not.

For those investors who do not wish to embrace oil stocks, for financial or philosophical reasons (or both), it is worth considering the following:

  • From a dividend perspective, the oil majors’ combined forecast pay-out represents its lowest portion of the FTSE 100 total since 2005;
  • From an earnings perspective, BP and Shell’s contribution is way lower than it was in 2005, when they generated one-third of FTSE 100 profits between them.

These numbers at least explain why oil shares are doing so badly. The FTSE All-Share Oil & Gas Producers sector is now worth just 7.1% of the FTSE All-Share itself, a fraction above 1992’s modern-day low of 6.3% and almost identical to 1998’s cyclical trough of 7.0%.

Those dates are interesting because BP cut its dividend in 1992 (just as it has done this year), while crude oil prices dipped briefly below $10 a barrel in late 1998, just as they did this spring.

CRUDE CALCULATIONS

On a global basis, oil shares’ weighting in the S&P Global 1200 index and America’s S&P 500 benchmark stands at record lows of 2.9% and 2.2% respectively. The S&P 1200 Energy index’s valuation of $1.3 trillion means the industry currently carries a lower price tag than Microsoft and is worth barely four times more than Tesla, whose current car volume sales are tiny, at least for now, at around 100,000 units per quarter.

Investors with exposure to individual oil firms, specialist energy funds (be they active or passive) or geographic stock indices with a hefty exposure to oil companies (which would include the FTSE 100) must now decide if this marked bout of oil stock underperformance is merely cyclical or the result of something more structural.

If BP’s zero-carbon scenario holds true, even the most wilfully contrarian investor may struggle to make a case for exposure to oil stocks, at least until the earnings mix begins to truly slant away from hydrocarbons, as it is hard to divine what could be a catalyst for higher oil prices and thus higher earnings.

Yet if the ‘no change’ case pans out, owing to political or social inertia, the picture could be very different. Demand could recover in a post-pandemic world and do so just as oil majors cut investment, US shale output falls and global oil rig activity is down more than 50% year-on-year.

That could make for a surprise cyclical comeback from an industry that financial markets seem to be writing off – the FTSE All-Share Oil & Gas Producers index rose 50% in 2016, the year after BP and Shell last made a combined loss, just as they are forecast to do in 2020.

Whilst hard to predict, as you can see from the above article, the suggestion is that oil demand could go down by three-quarters between now and 2050 as the world strives to be ‘zero-carbon’. The lockdowns imposed by governments due to the pandemic have shifted peoples focus more than ever to a ‘green’ ‘zero-carbon’ world.

Please continue to look out for our regular blog posts.

Andrew Lloyd

21/09/2020

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AJ Bell – High yielding trusts: are the rewards worth the risks?

Please see article below from AJ Bell received 17/09/2020.

High yielding trusts: are the rewards worth the risks?

Investors hungry for income could find some opportunities once they’ve fully understand the business models of alternative investment trusts

Thursday 17 Sep 2020 Author: Hannah Smith

 Investment Trusts

Many investment trusts offer high yields which might tempt some investors in the current environment. But are they more trouble than they’re worth?

Some may be worth pursuing, while others can have complex investment models and come with underappreciated risks.

HOW MUCH CAN YOU GET?

Data from the Association of Investment Companies implies there are numerous investment trusts offering yields of 8% to 12% or even more, but the areas in which they invest are quite esoteric.

Doric Nimrod Air Two (DNA2) and Doric Nimrod Air Three (DNA3), for example, are trusts which buy aircraft and then lease them to airlines, while Tufton Oceanic Assets (SHIP) leases ships.

While investing in the Doric funds is really a binary bet on the survival of its main customer, state-owned airline Emirates, the Tufton fund has a more diversified portfolio of ships, although it has been affected by changing supply and demand and disrupted global trade due to Covid-19.

Miton fund manager Nick Greenwood owns Tufton in his portfolios, benefiting from its 8.6% yield. He says the assets have ‘residual value’ as scrap steel even if their value depreciates.

SPECIALITY FINANCE

Many high-yielding trusts borrow money to increase the pool of cash available to invest (known as ‘gearing’) and then use that money to invest in other people’s or companies’ debt. This web of involvement in the debt space may not appeal to risk-averse investors.

Volta Finance (VTA) is involved in corporate credit, mortgages, and auto and student loans, while Honeycomb (HONY) focuses on asset-backed consumer, property and small business loans.

Blackstone/GSO Loan Financing (BGLP) and Volta are among those trusts investing in collateralised loan obligations (CLOs), a single security backed by a pool of debt. Investors get geared exposure to leveraged loans which amplifies the risks.

Packaged loans played a key role in the events that caused the global financial crisis, so they will sound unpalatably risky for a lot of investors. But Sachin Saggar, an analyst at Stifel, says CLOs held up quite well throughout past crises.

‘If you look at how CLOs behaved in 2008, they actually came through quite well. They ultimately recovered all their losses plus more. But what you get with them is more volatility and risk.’

Greenwood at Miton says he is ‘nervous’ about some alternative lenders which have relatively new and untested business models. ‘Some of them seem to have run into problems lending money to people that decided they didn’t want to pay it back in benign conditions, so I wonder what’s going to happen in tougher conditions,’ he comments.

FURTHER USES OF GEARING

More mainstream trusts that offer high yields are Aberdeen Standard Equity Income (ASEI), Merchants Trust (MRCH) and Chelverton UK Dividend (SDV), in the UK Equity Income sector; and Acorn Income (AIF), in the UK Equity & Bond Income sector.

These trusts can pay high yields because of their use of gearing. Greenwood comments: ‘If a trust draws draw down some debt, they can actually pay out a much higher yield using the investment trust capital structure, but obviously that speeds up the rise or fall in the net asset value. You should always look at the leverage.’

HIGH YIELDS FROM PROPERTY

There are also property funds in the list of high-yielding trusts, such as Regional REIT (RGL), which was, until recently, yielding more than 11% through investing in commercial property such as offices and industrial building outside the M25.

Unfortunately, last month it reduced its quarterly dividend by 21% after adopting a more conservative approach during the pandemic. That still leaves it on an 8.9% yield based on guidance for dividends for the rest of the year and the ones already declared.

Real Estate Credit Investments (RECI), Starwood European Real Estate Finance (SWEF), and ICG-Longbow Senior Secured UK Property Debt Investments (LBOW) also feature among the highest-yielding trusts. They provide loans to commercial and residential assets at low loan-to-values.

Saggar notes it is currently hard to value property assets, so these trusts have traded down, however, he thinks their yields ‘seem relatively robust at this point’.

‘NOT A FREE LUNCH’

So how reliable have these funds been in terms of the track record of their yields, and how sustainable are these sky-high payouts?

Some trusts suspended or reduced their dividend payments in Q1 but have since restarted them, explains Saggar.

In a recent note on CLO funds, Stifel said there were ‘good reasons’ for funds to amend their dividend policies, namely the impact of coronavirus, but that many were trying to sustain payouts. ‘We highlight Blackstone and Volta as being the most cognisant of shareholders’ desire to continue to receive an income,’ it said.

In July, Stifel said Doric Nimrod should be able to keep up 20%+ yields on its funds for longer than expected, despite an uncertain environment.

Payouts overall have been relatively stable across the sector, says Saggar, although discounts to net asset value have widened on some trusts.

‘There are some bargains to be had because people have got rather nervous about some of these very high-yielding trusts, so there are some discounts around,’ notes Greenwood. However, the reason for wider discounts is that investors perceive rising risk, and this is something to bear in mind when looking for high yields.

‘If something’s yielding 8%-plus, there’s a reason why and it’s not without risk. It’s not like it’s a free lunch,’ adds Saggar.

So does holding a high-yielding trust mean investors are signing up for a wild ride? Not necessarily.

‘There is an argument that the high yield will actually smooth the volatility in the share price,’ says Greenwood. ‘But when you get events like the global financial crisis and the Covid-19 crisis, you’re reminded that anything can happen in the short term.’

Please continue to check back for our latest updates and blog posts.

Charlotte Ennis

18/09/2020

Team No Comments

Brooks MacDonald MPS Monthly Market Commentary August 2020

Please see below for Brooks MacDonald’s MPS Monthly Market Commentary from August, received by us late yesterday 18/09/2020:

  • Global equities resumed their upwards trajectory during August, as signs of economic improvement and positive developments on a COVID-19 treatment boosted optimism about a worldwide recovery. Further strains in US-China relations unsettled markets, although there was an apparent ease in tensions late in the month.
  • UK stocks were up during the month, after it emerged that the economy expanded by a stronger-than-expected 8.7% in June from May1 . However, GDP shrank by a record 20.4% over the second quarter2 , which pulled the economy into a deep recession. A renewal of quarantine rules for people arriving in the UK from certain countries pressured stocks, particularly those in the travel sector. The composite purchasing managers’ index (PMI) rose to 60.3 in August from 57.0 in July3 , according to an early estimate.
  • US equities were higher over August. Hopes of further government stimulus – yet to be finalised by month end – optimism about a vaccine and a continued rally in technology stocks propelled the S&P 500 and the Nasdaq Composite indices to record highs. The contraction in second-quarter GDP was revised to 31.7%, on an annualised basis, from 32.9%, although it remained a record slump4 . The composite PMI rose to 54.7 in August from 50.3 in July5 , an initial estimate showed. In a significant change to monetary policy, the Federal Reserve said that it would adopt a more flexible inflation target regime aimed at supporting employment and the economy.
  • European markets moved upwards, helped by signs of economic improvement, particularly in Germany, and optimism about a COVID-19 treatment. However, the UK quarantine rules, which mostly affected European countries, unsettled investors. The composite PMI fell to 51.6 in August from 54.9 in July6 , an initial estimate showed.
  • Japanese equities increased over August, although Prime Minister Shinzo Abe’s resignation, due to poor health, rattled the market late in the month. Stocks made a strong start to August as they tracked gains in US shares and as a weakening of the yen against the dollar boosted exporters. The rises came despite bleak economic news: GDP shrank by a record 7.8% over the second quarter, which pushed the country deeper into recession7 . The composite PMI was unchanged at 44.4 in August8 – remaining in contractionary territory – an initial estimate showed.
  • Asia-Pacific stocks (excluding Japan) made gains over the month on continued signs of economic improvement, particularly in China. The US-China tensions restricted the increases. In China, a rise in exports and reduced factory price deflation in July boosted optimism about an economic recovery. The same optimism helped push South Korea’s Kospi Index to a two-year high during the month. Taiwan’s Taiex Index came under pressure after a sell-off in technology shares. Australia’s benchmark S&P/ASX 200 Index was little changed as optimism about a vaccine was largely balanced by continued worries about COVID-19 infections in the country.
  • Emerging markets edged up over August, on optimism about a vaccine and as US-China tensions appeared to ease. Indian shares rose steadily, with vaccine hopes helping the BSE Sensex 30 Index to reach a six-month high. Brazilian equities dropped on renewed political uncertainty as the resignation of a number of top economic officials imperilled planned reforms. Equities fell in Argentina as the country battled rising COVID-19 infections.
  • Benchmark yields on core developed market government bonds – including the US, UK, Japan and Germany – rose over the month. US benchmark 10-year Treasury yields hit a record low closing level of 0.52% on 4 August9 because of market concerns about an economic recovery, although they rose steadily over the rest of the month. In the corporate debt market, US investment-grade and high-yield spreads tightened further.

Brief and informative articles like these are an efficient way to take away key points regarding recent market developments globally.  

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

17/09/2020

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UK equities outperform as sterling drops sharply

Please see below up-to-date commentary from Brewin Dolphin, received late yesterday. The article provides insight into mixed market performance with Covid-19 and Brexit developments noted as current contributing factors. 

Equity markets were mixed last week as markets struggled to gain traction amid a flow of (mostly) worrying news. There was the worsening second wave of Covid-19 in Europe and the announcement of tighter restrictions on socialising in the UK. Then, a potential hitch with the AstraZeneca vaccine, added to increasing worries of a no-deal Brexit. On the financial front, perhaps the most remarkable development was the 3.5% fall in sterling which likely helped the FTSE100 outperform its international peers over the past week.

Last week’s markets performance*

• FTSE100: 4%

• S&P500: -2.5%

• Dow: -1.66%

• Nasdaq: -4%

• Dax: +2.8%

• Hang Seng: -0.77%

• Shanghai Composite: -2.83%

• Nikkei: +0.86%

*Data for the week to close of business, Friday 11 September.

A mixed start to the week

Equity markets in the UK and Europe turned in a mixed performance on Monday despite encouraging news about the resumption of the AstraZeneca/Oxford University vaccine trials in the UK.

The FTSE100 closed 0.1% down on Monday and the more domestically focused FTSE250 rose by 0.7%. Sterling rose 0.76% against the dollar to $1.289, and by 0.42% against the euro to €1.085.

In Europe, the pan-European Stoxx600 gained 0.15%, the German Dax fell by 0.07% while France’s CAC-40 closed up by 0.35%.

In the US, however, the positive vaccine news from the UK helped boost sentiment, as the Dow closed up by 1.2%, the S&P500 rose by 1.27% and the Nasdaq rebounded by 1.87% to 11,056.65.

Analysts said hopes about an early vaccine were tempered by concerns about rising Covid-19 cases in the UK and Europe leading to tighter suppression measures, with a consequent dampening of economic activity.

In early trading on Tuesday morning, UK shares were heading up.

Brexit is back

The developments over the last week have suggested an increased risk of a no-deal departure. And just as in previous bouts of Brexit-related stress, the worse things go, the greater the pressure is on the pound. The fortunate thing from an investment perspective is that this tends to be supportive of UK bonds (which perform inversely to the UK economy), and also UK equities, because of their inverse sensitivity to the level of the pound. In other words, when the pound falls, all other things being equal, most UK equities rise.

This might seem counterintuitive, but the reality is that the sensitivity of even UK equities to the UK economy is generally low and mostly limited to a small number of sectors, such as retail, real estate, home construction and banks. More broadly, the overall market tends to be more exposed to the overseas currencies in which its revenues are denominated. For example, around 75% of the earnings for companies in the FTSE100 come from overseas and so are denominated in foreign currencies. Therefore, when the pound falls, these earnings are worth more in sterling terms and this helps UK equities.

Overseas equities, unsurprisingly, are even more inversely sensitive to the level of the pound as they are both denominated in foreign currency and economically linked to revenues received in other currencies.

Below we show the % change in trade weighted currency, the top graph shows 2015 to present and the bottom chart shows the period from 15 May 2020 to present.

What this means

All of which means that, ultimately, we don’t see Brexit as a material investment risk. Paradoxically, the greater issue for us is how to protect wealth when Brexit risks subside because, under those circumstances, we would expect to see the pound rise and bonds (and possibly equities) fall – again, all other things being equal.

So how do we see Brexit developing? It seems likely that the current standoff is another episode of the brinksmanship that has been exhibited throughout the last four years. The intention of the government is to pressure the EU into making some concessions on fishing and, most notably, state aid. Most outstanding issues between the EU and the UK seem reconcilable, but the state aid point is one the UK government seems to want to push. Why? It seems like the government wants to ensure it can do everything it can to support strategically sensitive industries such as technology and renewables. This idea of a “Made in UK” strategy to match the “Made in China 2025” strategy is what the European’s are afraid of. It seems likely that, when push comes to shove, the UK will be forced to find a way of discreetly backing down – but we can’t be sure.

Covid-19 developments

This also comes with an adverse trend in relative Covid-19 performance as well. America’s renewed surge in cases which began in the Midwest has failed to gather pace while some large states are seeing further improvement. Progress is not universal, however, and as we can see from Europe, a true second wave is likely in the US at some point. But for now, the US case growth numbers are improving which is helpful for Donald Trump as we approach the election in November.

Case growth in the UK, on the other hand, has accelerated. This prompted the government to impose new restrictions that came into effect from Monday to great consternation from the back benches. Evidence continues to point to Covid-19 as a continuing threat with the low rate of hospitalisations during France’s second wave now beginning to pick up. The concern here is that young people are spreading the virus amongst themselves and then introducing it to older generations of their families.

Covid-19 and your investments

Regarding the investment risks of a second wave of Covid-19, we believe that investors already expect successive waves until such time as there is a widely available vaccine. The question from an investor’s perspective therefore is not so much whether further waves come, but what the impact is on perceived valuations.

Understanding how the market reacts to that is not trivial. However, we should distinguish between what we saw in the early part of 2020 which was a shock, from what we might see in future periods, which will be more of an evolution of a known risk.

When we had the shock in March it was largely because the structure of the policy environment and the market were both set up for late-stage economic expansion. That is quite typical for the entry into a recession and is the reason that equity markets react so poorly to the onset of recessions.

On a valuation basis, the loss of a year or two’s worth of earnings is bad news but would not justify the falls seen earlier in the year – hence markets were able to rebound substantially.

With Covid-19 much more of a known-unknown, and with market expectations of ebbing and flowing regional measures to try and slow those waves, we acknowledge that Covid-19 remains an important factor for the market, but it should form part of the ‘wall of worry’ that markets often find themselves climbing.

Wall of worry

The cliché about climbing the ‘wall of worry’ describes the way in which markets are often resilient in the face of known risks. It assumes investors gradually become resigned to the fact that these issues will be resolved in due course and reflects the way in which the overly cautious gradually get sucked into the improving narrative. It is helped by such circumstances also tending to coincide with periods when monetary policy is very supportive.

One more handhold on that wall came from the news that the testing of AstraZeneca’s vaccine has been paused. Although one of the front runners, this was not the only candidate. However, over the weekend it emerged that the trial would resume in the UK and India, but it remains paused in the US.

Also providing a great deal of angst is the planned end to the furlough scheme next month. Chancellor Rishi Sunak is under a great deal of pressure from lobbyists and trade unions to extend the scheme further to prevent a “tsunami” of job losses this autumn.

An extension would not be without international precedent. Germany has announced an extension to its Kurzarbeit scheme, which gives financial aid to employers while allowing them to reduce employees’ hours. It had been scheduled to finish in March 2021 but has been extended for another year. France has also extended its version of the furlough scheme but has tweaked the rules so that employers must reduce hours for workers rather than keep them off work altogether. If the British government is going to follow suit, it is leaving it late.

We strive to update our blog content regularly in order to provide the most relevant and accurate data so please check in again with us soon.

Stay safe.

Chloe Speed

16/09/2020